Topic: Value Stocks

What is a Value Stock? An Opportunity for Future Gains in Disguise

What is a value stock worth to savvy investors who recognize its potential? Depending in part upon the hidden or undiscovered aspects of the stock, it could mean much higher stock values in the future and greater gains over the long term.

What is a value stock? A value stock is a stock that is reasonably priced, if not cheap, in relation to its sales, earnings or assets.

Investors hold onto the best value stocks because they expect that other investors will in time recognize their value and push up their share prices. High-quality value stocks like these are difficult to find, even when the markets are down. But when you know what stocks to look for, you can uncover them.

The Profits from Hidden Value

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Canadian Value Stocks: How to Spot Undervalued Stocks Plus Our Top 4 Value Stock Picks and more.

How investors find value stocks

Virtually all successful investors have some form of a value investing strategy.

Many successful investors also have some knowledge of technical analysis, and most have some knowledge of a variety of other tools and shortcuts. But almost all successful investors take a broad view, and apply everything they know to their investing decisions.

When you look for stocks that are undervalued, it’s best to focus on shares of quality companies that have a consistent history of sales and earnings, as well as a strong hold on a growing clientele. Furthermore, we recommend using a few basic ratios.

  • Low price-to-earnings and price-to-book ratios may be signs of cheap or undervalued investments.
  • Low price-to-book-value ratio is another sign that a stock is cheap in relation to other stocks on the market.
  • Dividend yield is the stock’s annual dividend divided by the share price. A high dividend yield could indicate a cheap stock that is set to rise.

Ideally, what is a value stock made of? Hidden assets and spinoffs are two common components

Hidden assets are valuable assets that investors often overlook, discount or disregard altogether. They can be found in real estate on the books at historical prices, in research spending, in well-known brand names and so on.

If you buy a stock for its hidden assets, yet those assets stay hidden or ignored by investors— or turn out to be less valuable than you thought—it can’t hurt too much. By definition, a stock’s hidden assets have had little impact on its price. If you paid little to get the benefit of those assets, you have little to lose. But the best hidden assets will eventually expand a company’s profit, grab investor attention, and push up its stock price.

You should always look for hidden assets when evaluating a stock. Stocks with hidden assets are not rare, but they’re hard to find. As mentioned above, these three financial ratios can be used as a guide to further evaluating stocks with hidden assets once you have found them: price-earnings ratios, price-to-book-value ratios, and price-cash flow ratios.

As for spinoffs, when they begin trading, it stands to reason that some investors will put a low price on them. After all, a spinoff hits the market with a large number of neutral, if not reluctant, stockholders who have limited expectations for it, and who are willing to sell when they get around to it.

Among the investors who might be willing to buy a new spinoff are value investors. On the whole, it pays to follow the lead of these seekers of undervalued stocks, and to hang on through a period of sluggish trading while reluctant spinoff holders exercise their urge to sell.

What is a value stock worth over time?

It is best to practice patience with your investments, especially value stocks. All too often, investors buy a promising stock just as it enters a period of price stagnation. Even the best-performing stocks run into these unpredictable phases from time to time. They move mainly sideways in a wide range for months or years before their next big rise begins. (Stock brokers often refer to these stocks as “dead money.”)

If you lack patience, you run a big risk of selling your best choices in the midst of one of these phases, prior to the next big move upward. If you lose patience and sell, you are particularly likely to do so in the low end of the trading range, when stock prices have weakened and confidence in the stock has waned.

Bonus Tip: “Dollar cost averaging” is a great way to buy undervalued stocks.

When you find what you feel are the most undervalued stocks, consider investing at least some of your funds in “dollar cost averaging.” Invest the same dollar amount on a regular basis. That way you’ll buy more shares when prices are low, and fewer when they’re high.

In fact, if you invest a fixed sum at regular intervals throughout your working years, perhaps increasing that sum from time to time as your income rises, you can largely forget about market trends. If you factor in dividend payments, dollar cost averaging could make a huge difference to your long-term profits.

Hidden problems are a reality with some value stocks. Have you ever experienced these investment woes after buying seemingly-undervalued stocks?

Value stocks can test your patience. What have you learned from buying or selling a value stock that failed to climb in value after several months or years?


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